FOR STATE BUDGET, NOTHING TO ‘LIKE’ ABOUT FACEBOOK IPO

Facebook’s stock price is currently hovering just above its all-time low.

Shares have lost nearly half their value since they hit the market in May.

The social network’s executives, employees and investors aren’t the only ones disappointed by the stock’s underperformance. The state of California was hoping for roughly $2 billion in tax revenue from the company’s initial public offering.

The state Legislative Analyst’s Office predicted that Facebook stockholders cashing in their shares would account for 20 percent of the growth in California’s personal income this year. But if the stock continues to sink, tax revenue will fall hundreds of millions of dollars short of budget projections.

California’s leaders have no one to blame but themselves for pegging the state’s fiscal future to the vagaries of the stock market. The state’s steeply progressive income tax rates – which cause it to spend with abandon during flush times and generate fiscal crises when incomes dip – are driving it toward fiscal ruin.

California’s personal income tax rates are the second-highest – and among the most progressive – in the nation. The top 10 percent of earners pay almost 75 percent of taxes.

The state does not distinguish between earned income and capital gains. The latter, of course, form a greater share of the income of the highest-income earners. So California’s income tax system, by relying on the wealthy for most of its proceeds, is heavily dependent on capital gains.

Income from capital gains is inextricably linked to the health of the stock market. So it’s much more volatile than that from labor. Consequently, California’s tax take can vary widely from year to year. An IPO that doesn’t perform as expected can cause the state’s budgetary projections to go up in smoke.

Indeed, California has repeatedly overestimated revenue inflows during difficult economic times – and underestimated them during periods of economic growth. Since the 1981-82 fiscal year, the state’s budget experts have hardly ever gotten it right.

During the economic boom of 1994-2000, California’s capital gains income rose from $28 billion to $165 billion. Then the tech bubble burst, and capital gains fell to $68 billion in 2002.

The housing bubble followed, and capital gains income shot back up to $153 billion in 2007. That bubble burst, and back into the tank the state went; capital gains income plummeted to $56 billion in 2009. That cost the state $9 billion in tax revenue in 2008 and 2009.

The Legislature tried to make up for the loss by raising income and sales taxes in 2009. Now, with the stock market failing to produce the capital gains – and the tax revenue – officials were hoping for, most politicians across the state, including Gov. Jerry Brown, are again supporting a proposition to raise tax rates.

History shows that continuing on such a path will cause California’s fiscal health to deteriorate further.

The 1 percent may not be an especially popular segment of the population, but without them, California doesn’t have a budget. And they don’t have to live in California.

During the last 20 years, population outflows from the Golden State have responded to tax rates. During the extraordinarily high tax year of 1994, for example, about 450,000 people fled the state. Many of them moved to Colorado, where voters had just approved a constitutional amendment that severely restricted the state’s power to raise taxes.

To prevent that from happening again – and to protect the state’s fiscal situation from deteriorating further – state leaders should throw out the current tax structure and replace it with a flat tax.

A single tax rate for individual taxpayers and businesses assures them that they aren’t going to be punished disproportionately if their incomes rise.

People will be less likely to try to avoid taxes by underreporting income – or by moving to another state.

A flat tax can also put an end to the state’s yearly revenue roller coaster, where the stock price of the latest IPO makes or breaks the state budget.

Californians old enough to remember the 1992 presidential campaigns may remember that a Democratic candidate proposed just such a flat tax for the entire United States. His name? Jerry Brown.

Laffer is chairman of economic research and consulting firm Laffer Associates and author of the book “Eureka! How to Fix California,” published by the Pacific Research Institute.